Hitachi Home?s recent entry into the low-priced home airconditioner segment gives it enough room to significantly step up its market share. Price hikes in March will turn it on further
HITACHI Home and Life Solutions (India), engaged in manufacture and sale of air conditioners, is seen an attractive stock because of seasonal rise in demand, recent price hikes, and the company?s entry into the sub-premium segment that is seen boosting sales. The steep fall in the stock price by nearly 35% over the past 5-6 months gives a good buying opportunity.
COMPANY :
Hitachi Home, a subsidiary of Japan?s Hitachi Appliances, has presence in home AC, commercial or ductable AC and telecom AC categories. Nearly half of its total revenues is contributed from home AC segment. Ithas airconditioner manufacturing facilities in Kadi (north Gujarat) and Jammu. The company is also engaged in trading of chillers, washing machines, and refrigerators. However, trading activity has a very
minuscule contribution to its total revenue.
GROWTH DRIVER:
In FY10, home air conditioner industry experienced a growth of 25% in comparison to 7% growth in FY09. At present, the penetration level is low at 3%.Hitachi?s recent entry into the lower-priced home air-conditioner segment will allow it to increase its market share. Currently, the premium home air-conditioner business accounts for around half of the company?s revenue while the rest comes from corporate business.
The company, which was till now present only in the premium category, will now be able to penetrate tier-II and tier-III towns with its lower range products. Hitachi has also increased distribution network and set up new service centres for customer support. The company has undertaken price hikes across product categories to offset rise in input costs and staff expenses.
FINANCIALS:
Hitachi?s earnings growth momentum, seen from FY05 to FY10, has been hit in the current year due to the company?s inability to pass on rise in input costs to customers. Rising staff expenses, depreciation, and interest cost also weighed on earnings in the nine-month ending December.
Hitachi?s net profit in the first 9 months of FY11 was 14.5 crore, down from 36.2 crore a year ago. In FY10, the company reported net profit of 46 crore, a 5-year compounded annual growth rate (CAGR) of 25.3%, on net sales of 681.3 crore, a 5-year CAGR of 19%. The October-December quarter was the worst hit with profits down at Rs 0.5 crore.
Going forward, the company is seen cashing in on the price hikes announced in March. We expect sales to rise from June quarter of FY12. Our research shows that this year, sale of air-conditioners has picked up in mid-March, a little later than in previous years. The sales that were expected in March are now seen spilling over to the June quarter due to the delayed start to summer.With debt of Rs 60 crores, the company?s current debt-to-equity is 1.82. The return ratios have been very impressive till FY10. Return-on-capital employed for FY10 was 32% and return-on-equity was 36%. But the large capex of FY10 and low earnings in FY11 would hit the return ratios.
VALUATIONS:
Currently, the company is trading at a trailing price-to-earning multiple of 16.5. The rise in price-to-earning despite the steep fall in stock price is due to faster drop in earning per share. Hitachi?s peers, Voltas and Blue Star, are trading at P/E multiple of 14.5 and 16.7, respectively. Viewed vis-à-vis peers, Hitachi looks more attractively valued due to its growth prospects and higher contribution from home air-conditioner business.
Considering Hitachi?s dull show so far this fiscal, a risk-averse investor would wait and watch the March quarter earnings before buying into the stock. However, long-term investors and the ones eyeing high-risk and high-return can consider buying the stock at current levels of around Rs 216.